Board of Governors of the Federal Reserve System

Section 23A of the Federal Reserve Act imposes limits on certain financial transactions between Federal Deposit Insurance Corporation-insured banks and their affiliates. These limits aim to prevent implied taxpayer subsidies from the Deposit Insurance Fund (DIF) spilling over from a bank to its affiliates. These limits also aim to protect banks from excessive exposure to their riskiest affiliates. However, these restrictions have generally not been applied to transactions between a bank and its subsidiaries.

Morgan Stanley has requested an exemption to move its German investment banking subsidiary in the holding company chain, that represents a material amount of Morgan Stanley's foreign trading activities, under its national bank, Morgan Stanley Bank, N.A., through a transaction which would otherwise be prohibited by section 23A.

This move would cause transactions between the national bank and the German investment banking subsidiary to fall generally outside the protections provided by section 23A and its requirements. Further, by placing such activities underneath the national bank, this move creates a more direct channel from any distress Morgan Stanley's European trading subsidiaries may experience to Morgan Stanley's insured national bank, and thus to the DIF.

Morgan Stanley remains globally competitive without an exception from the requirements of section 23A, and there is no indication that granting this request is necessary to support Morgan Stanley's capacity to provide services to its customers or to avoid financial distress.

Because I believe Morgan Stanley's request is inconsistent with the purpose of section 23A of the Federal Reserve Act and poses significant risks to the DIF that are not outweighed by discernable public benefits, I dissent.

Further, for the reasons I have just articulated, I am especially concerned that granting this exemption request would be perceived as precedent-setting.